For many first-time homebuyers, the only reason they’re even able to get on the property ladder is because they’ve received help from the so called, Bank of Mum and Dad (BOMAD). But with mortgage rates on the rise, even this portion of the population is feeling the squeeze. To find out the effect this could have on the future of the housing market, read on.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
The Bank of Mum and Dad
The fact that many parents end up helping or entirely funding their children’s dreams of home ownership is so well known that The Bank of Mum and Dad is affectionately known as BOMAD in the industry. This group is estimated to have provided £8.8 billion of residential property finance to 170,000 first-time buyers in 2022 alone.
There are several ways parents can help their children buy their first home. Here are a few options:
- A financial gift (gifted deposit)
- A loan
- Taking out a retirement interest-only mortgage
- Taking out a guarantor mortgage
- Family offset mortgages
- Getting a joint mortgage
- Taking out a Joint Borrower, Sole Proprietor mortgage
Trouble on the way
But rising mortgage rates are causing some amateur lenders (aka Mum and Dad) concern. At a time when you’re meant to be winding down your spending and getting ready for retirement, how do you balance that with the desire to help your loved ones get a foot on the property ladder?
And what about being on the receiving end? Asking your parents for financial help is now an even bigger ask than ever before. Some children might not feel like they can ask for that much assistance and put off buying a home even if they need to.
The reality is that parents have been a consistent and reliable source of gifts and/or loans to nearly half of first-time buyers over the last decade. And while you won’t need to worry about interest rates on a loan or gift from them, as a buyer you will inevitably have to deal with mortgage rates from a professional lender.
And parents will have their own mortgages to worry about. They will likely have to deal with the rising interest rates in some capacity at some point, typically when their fixed deal ends. When that time comes, will their finances allow them to help their children?
Options for the Bank of Mum and Dad
If you’re a parent and your child approaches you for financial assistance in buying you a home, whether or not you agree will depend on a few factors. You’ll need to consider whether or not you’ve already done anything to reduce your mortgage outlay, how long your support is needed, how much capital are you willing to lend or gift, and whether or not you have any extra income you can lend or give away.
You’ll also need to take inheritance tax (IHT) into consideration, as well as any other taxes you may be subject to. This makes it essential that you receive financial advice. After all, a lender will undertake due diligence before lending, shouldn’t members of BOMAD do the same?
Decision-making assistance
No matter which end of the BOMAD you find yourself on, it’s important to speak with a financial adviser to ensure you’re proceeding with caution. You’ll want to ensure you make education decisions and include tax considerations in your plan. The experts of Dental & Medical Financial Services can take a look at your family finances and guide you to how your goals can be achieved. Get in contact with our team today.